George Osborne’s budget cut to social housing rents of 1% a year for the next four years is set to throw organisations such as the Curo Housing Group into their biggest financial crisis.

The announcement caught Curo Housing by surprise. Just last year the government had committed to it increasing its rents based on CPI plus 1% a year for the next decade.

Devonshires, the leading social housing law firm, warned its clients in a briefing on Wednesday evening that the consequences of the cut were “potentially very serious”. Because of the previous 10-year promise, Devonshires said Mr Osborne’s decision was “significantly susceptible to a judicial review application”.

Several senior social housing sources said that some landlords would go bust as a result of the cut.

It means that by 2020-21, landlords’ rents will be 12 per cent lower than previously forecast, according to Treasury estimates. The Office for Budget Responsibility said the drop in rental income was likely to result in housing associations calling off plans to build homes.

In addition to hitting housebuilding volumes, the cut is likely to reduce the value of landlords’ properties, and could result in breaches of loan covenants and even auditors refusing to sign off accounts on a “going concern” basis, Devonshires warned.

Robert Grundy, head of housing at property advisers Savills, said the value of landlords’ homes — based on the most common methodology used by auditors — would fall 25 to 30 per cent immediately, and by as much as 40 per cent over four years.

One longstanding housing association chief executive said the cut was “by far and away the biggest threat I’ve faced” in more than three decades.

“Undoubtedly some organisations will run out of cash, and not just small associations either — some big landlords will come unstuck,” he said. “It was only last year they said our rents would rise based on CPI for 10 years, and we’ve all gone out and borrowed billions of pounds based on that.”

Andrew Cowan, senior partner at Devonshires, said he was concerned that lenders might be tempted to try to pull unsigned financing deals or restrict landlords’ access to previously arranged borrowings, which could cause liquidity problems for affected landlords.

Moody’s credit rating agency warned on Thursday that the cut was “credit negative” because it would “reduce housing associations’ revenue streams and suppress operating margins”.

The OBR warned on Wednesday that government interference in housing associations’ businesses — including the forthcoming extension of Right To Buy, and the new rent cuts — risked reclassifying the private organisations as public sector bodies.